The bond market took the day off on Friday, but is back to work today and headed lower again. The 10-year Treasury yield is up five basis points to 2.205% (it ran all the way up to 2.28% earlier).
The S&P 500 is down just a hair, but he XLU is lower by 0.6%.
Among the large-cap utility movers are Dominion Resources -1.15%, Duke Energy -1.15%, Con Ed -1.2%, National Grid -3.7%, Sempra Energy -1.5%, Southern Co. -0.75%. Fading the downward action are Exelon +1.6% and Ameren +0.75%.
Surging interest rates this week had investors pulling money from income favorites like REITs and utilities, and rotating into yield-starved banks, insurance companies, and brokerages.
With the bond market closed for Veteran's Day, rates are taking the day off, and REITs and utilities (XLU +0.3%) are seeing a sizable bounce. VNQ +1.1%, IYR +0.9%
Retails rates are thought to be more exposed than most to rising rates, and they were among the hardest hit. Today: Realty Income (O +1.6%), Vereit (VER +4.3%), National Retail (NNN +1%), Store Capital (STOR +4.3%)
Other equity REITs: Omega (OHI +0.5%), LTC Properties (LTC +2%), Healthcare Trust (HTA +2.2%), Gramercy Property (GPT +3%), Gladstone Commercial (GOOD +4.3%), Lexington Realty (LXP +2.4%), General Growth (GGP +1%), Simon Property (SPG +1%), Retail Opportunity (ROIC +2.5%), Life Storage (LSI +1.4%), First Potomac (FPO +7.5%), Stag Industrial (STAG +1.5%)
Notably fading the move even as the dollar turns sharply higher are the lodging REITs: Ashford (AHT +2.9%), LaSalle Hotel (LHO +3.1%), Pebblebrook Hotel (PEB +3.9%), Chatham Lodging (CLDT +4.2%), Hersha (HT +3.7%)
Companies that sell electricity to utilities have reported slim profits or losses for Q3 compared to a year ago, as they continue to be hurt by falling prices for wholesale power and natural gas.
NRG Energy's (NRG +13%) Q3 net earnings fell by $203M, due to lower energy margins and costs related to paying down debt, on 11% less revenue of $3.95B; CEO Mauricio Gutierrez says its generation business "performed well during some very challenging market conditions."
Dynegy (DYN +8.6%) posted a Q3 loss of $249M, a 10x larger loss than in the year-ago quarter, saying it aims to navigate the low prices by buying plants and streamlining operations as well as ramping up lobbying efforts with regulators, including opposing New York's plan to subsidize money-losing nuclear power plants to keep them operating.
Calpine (CPN +2.7%) last week reported Q3 net earnings of $295M, up 8% Y/Y, but net profit for the first nine months of the year was just $68M, down 76% Y/Y.
Exelon (EXC +0.7%) has been faring better than some rivals since it also owns regulated utilities, which offer more stable profits.
"It's an adverse environment because of the low gas prices, and it's aggravated by the growth of renewables," says Hugh Wynne at investment research firm SSR.
In the green though is the banking sector - (KBE +0.2%), (KRE +0.4%) - which has been awaiting a real move higher in rates for years. A big move on the long end while short rates hold (for now) is an added boost as it widens the yield curve.
Bank of America (BAC +0.4%), Citigroup (C +0.4%), JPMorgan (JPM +0.4%), Wells Fargo (WFC +0.5%), PNC Financial (PNC +0.5%), Fifth Third (FITB +0.9%), U.S. Bancorp (USB +1.2%), BB& T(BBT +0.7%)
Other high-yield beneficiaries include: MetLife (MET +0.9%), Lincoln Financial (LNC +1.3%), Schwab (SCHW +0.4%), Voya Financial (VOYA +0.9%).
The amount of electricity generated by U.S. nuclear reactors hit its lowest seasonal level since 2006, held down by malfunctions and closures tied to Hurricane Matthew as well as routine maintenance.
The outages mean natural gas use by generators likely will rise as grid operators rush to replace lost supplies at a time of unseasonably warm temperatures, which could boost power prices.
Among the plants shuttered was Dominion's (NYSE:D) Surry 2 nuclear power plant in Virginia, which closed due to a system error, and NextEra Energy's (NYSE:NEE) St. Lucie 2 reactor in Florida, which went offline as a safety measure ahead of the hurricane.
The closures come as 23 nuclear units, accounting for ~23% of total U.S. capacity, are scheduled to close to replace spent fuel rods in the three months through November.
Utilities shares (NYSEARCA:XLU) fell today for the ninth straight session, marking their longest losing streak since 2002 and deepening the recent slide in income producing investments as investors warily watch central banks and interest rates.
The S&P Utilities sector has dropped 7.5% in the nine days, including a 0.3% fall today, trimming its YTD gain to 8.9%; during the period, AES -10%, EXC -8.8%, PPL -8.8%, PCG -8.2%, ED -8%, EIX -7.6%, SO -7.4%, NEE -7.4%, SRE -7.1%, AEP -6.8%, D -6.7%, DUK -6.5%.
“Trees don’t grow to the sky,” says Fred Alger's Management's Brad Neuman, “It was almost like the market was waiting for an excuse” to send high-yielding stocks back toward their historical valuations, adding that such stocks could have further to fall.
Even after the recent decline in share prices, utilities had a 12-month trailing P/E ratio of 21.4 as of Tuesday, vs. 19.8 for the S&P; at the beginning of the year, utilities had a lower ratio than the broader market.
One of the biggest Brexit beneficiaries is the utilities sector, as the Dow Jones Utility Average and the SPDR Utilities Select Sector ETF both surged to new record highs as Treasury yields tumble to multiyear lows.
The implied annual dividend yield for the Dow utilities is 3.08% and 3.18% for the utilities ETF, more than double the 10-year Treasury yield.
J.P. Morgan equity strategists said today that they believe bond yields "are not going anywhere but lower,” and thus remain overweight on the utilities sector.
At least six Dow utilities components posted record closes: NEE +3.3%, EIX +2.5%, AWK +2.4%, ED +1.9%, AEP +1.8%, PCG +0.8%.
Among other major utilities in today's trade: SO +1.9%, DUK +1.9%, SCG +1.6%, ETR +1.1%, D +1%, AEE +1%, XEL +0.9%, SRE +0.9%, PEG +0.7%, FE +0.7%, EXC +0.6%.
A sharp drop in long-term rates and vanquished expectations for even one rate hike this year has income players bidding up the prices of utility stocks (XLU +0.7%) and certain REITs even as the major average fall more than 2% post-Brexit.
A check of Fed Funds futures finds traders not fully pricing in a 25 basis point rate hike until 2018!
The mortgage REIT sector (REM +0.5%) welcomes the news, with players like Annaly (NLY +1.7%), American Capital Agency (AGNC +1.1%), Two Harbors (TWO +1.7%), and Chimera (CIM +1.3%) leading the way. Western Asset Mortgage (WMC -0.8%) is a laggard after slashing its dividend by more than 30% last night.
Equity REITs are decidedly mixed. Retail names like Realty Income (O +2.4%), National Retail (NNN +2%), and Vereit (VER +0.9%) are higher, as are healthcare players like HCP (HCP +1.2%) and Medical Properties Trust (MPW +0.1). Apartment REITs are mostly lower, as are mall operators like Simon Property (SPG -0.8%) and General Growth (GGP -0.7%).
The dollar is surging post-Brexit, however, and that's taking a chunk out of the hotel REITs: Hospitality Properties (HPT -1.5%), Sunstone Hotel (SHO -2.7%), LaSalle (LHO -3.8%), Pebblebrook (PEB -2.4%), RLJ Lodging (RLJ -2.5%).